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Markel Tax

21 Jul 2020

Repayment from its terminal loss relief claim

A trading company has incurred a trading loss of £300,000 in its final year of trading ended 31 March 2020 and wishes to claim terminal loss relief.

The company had taxable profits of £100,000, £150,000 and £200,000 in the previous three years ended 31 March 2019, 31 March 2018 and 31 March 2017 respectively.

In the period ended 31 March 2019, the company claimed credit relief in respect of £25,000 of foreign tax suffered on the same £100,000 of profits, reducing the tax liability of £19,000 for the Y/E 31 March 2019 to nil.

No foreign tax was suffered in the years ended 31 March 2018 and 31 March 2017.

How much can the company expect as a repayment from its terminal loss relief claim?

The trading loss incurred in the Y/E 31 March 2020 is eligible for terminal loss relief and may be carried back for offset against the total profits of the company arising in the three years (36 months) preceding the beginning of the accounting period in which the loss was incurred. Where terminal loss relief is being claimed against profits of multiple accounting periods, the losses must be offset as far as possible against the company’s total profits of later accounting periods before earlier accounting periods.

One particular issue in this case is that in reducing the total profits of the company in the Y/E 31 March 2019, the foreign tax credit relief being claimed against the UK tax liability will be wasted, as the foreign tax credit is the lower of the UK tax and foreign tax suffered on the same income. The terminal loss relief claim will reduce the UK taxable profits of that accounting period to nil before calculating the foreign tax credit, resulting in the double tax relief being wasted.

For example, £100,000 of losses will be carried back and offset against the total profits of the company in the Y/E 31 March 2019, reducing the profits chargeable to corporation tax to nil for that year and, therefore, the double tax relief available will be reduced to nil. It is not possible to partially claim terminal loss relief for a later accounting period and carry losses to an earlier accounting period in the attempt to leave an amount of profits chargeable to tax to increase the amount of foreign tax credit available.

Credit relief in respect of the foreign tax suffered is often the best choice of double tax relief as it offers a ‘pound for pound’ deduction against the corporation tax liability for tax suffered. However, as credit relief is going to be lost as a result of the terminal loss relief claim, it may be possible to claim a deduction for the foreign tax suffered against the profits of the company under s112 TIOPA 2010.

The tax return for the accounting period ended 31 March 2019 is still open to amendment and, therefore, the return can be amended to remove the double tax relief claim of £19,000 and instead claim a deduction against total profit for the foreign tax suffered of £25,000. This will reduce the total profits of the Y/E 31 March 2019 to £75,000 against which terminal loss relief could be offset.
Of the remaining £225,000 of losses, £150,000 could be offset against the profits of the Y/E 31 March 2018 and £75,000 could be offset against the profits of the Y/E 31 March 2017.

The total repayment that can be expected is approximately £43,500 (£150,000 x 19% + £75,000 x 20%). This will have been increased by £5,000 (£25,000 x 20%) as a result of the election under s112 TIOPA 2010.

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